AASB 137 - Provisions, Contingent Liabilities and Contingent Assets - July 2004
Example 11A Refurbishment Costs — No LegExample 11A Refurbishment Costs — No Legislative Requirement
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Example 11A Refurbishment Costs – No Legislative Requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the end of the reporting period, the lining has been in use for three years.
Present obligation as a result of a past obligating event – There is no present obligation.
Conclusion – No provision is recognised (see paragraphs 14 and 17-19).
The cost of replacing the lining is not recognised because, at the end of the reporting period, no obligation to replace the lining exists independently of the company’s future actions – even the intention to incur the expenditure depends on the company deciding to continue operating the furnace or to replace the lining. Instead of a provision being recognised, the depreciation of the lining takes account of its consumption, that is, it is depreciated over five years. The re-lining costs then incurred are capitalised with the consumption of each new lining shown by depreciation over the subsequent five years.